Wipro's Q3FY19 results (Neutral) - Margin recovery but guidance doesn’t imply acceleration
Q3FY19 result highlights
- Soft revenues, strong margin performance: Wipro reported adjusted sequential c/c revenue growth of 2.4% QoQ (IDFCe: 1.2% cc QoQ) and 7% yoy . Revenue stood at USD 2,047mn and adjusting for India business growth was +1.8/2.4% QoQ/CC. Revenue growth was aided by full quarter benefit of the Alight deal that incrementally contributed US$25 mn (1.2% to growth) in the Q3FY19. IT Services margin expanded stronger than estimates to 19.8% in Q3FY19. Net profit of INR 25.1 bn grew 33% qoq and was 5.5% ahead of estimate led by outperformance at the operating level and lower-than-expected ETR.
- Guidance remains weak: Wipro has guided for Q4FY19 USD revenue growth of 0% to 2% below our estimates of +1% to +3%. Muted guidance was given on account of macro concerns and growth issues in HPS and manufacturing.
- Margin performance get better: EBIT margin of 19.8% increased 120 bps sequentially and was contributed by- 60bps from currency, 60 bps from operational measures. Wipro expects EBIT margin to move in a narrow band. However, sustaining the margin holds the key, as supply-side constraints continue to pose challenge. In addition, resource constraints onsite can potentially increase subcontracting costs.
Key positives: Strong margin performance
Key negatives: Weak guidance.
Impact on financials: FY19 EPS increased by 6.4% on margin surprise, FY20E & FY21E EPS changed by +0.3% & -1.6%.
Valuations & view
Overall a mixed quarter from Wipro with better margin performance but muted guidance. Three of the six verticals have hit double-digit revenue growth on yoy comparison on c/c basis. More important is that these verticals account for close to 60% of revenues. Building up of a broad-based momentum is critical to turnaround effort, which Wipro is working towards. We think that Wipro is more levered to a broad-based uptick in tech spending and a more consistent delivery on market share gains and growth is needed for re-rating. We estimate a revenue CAGR of 5.4% over FY19-21E below peers valuations are fair given growth momentum. Retain Neutral with changed target price of Rs. 328 (15x PE of Dec-20)
Wipro is an information technology group based in India. Co. is engaged in the provision of information technology services. Co. is active as a global IT services company that provides a range of IT services, software solutions, IT consulting, business process outsourcing, or BPO, services and research and development services in the areas of hardware and software design to companies worldwide. Co. also provides outsourced research and development, infrastructure outsourcing and business consulting services. Co.operations are organized along two business segments: IT Services and IT Products.
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